US: Obama plan reignites tax fight

GOP Pans State of the Union Proposal to Boost Inheritance, Capital Gains Levies

President Barack Obama ’s plan for billions of dollars in tax increases and higher government spending, to be outlined in Tuesday’s State of the Union address, is reigniting familiar partisan debates about overhauling the tax code and how to best aid the middle class.

The White House views Mr. Obama’s proposals as the start of a broad discussion with the new Republican Congress over a rewrite of the tax code that includes not just corporate but individual taxation, as GOP lawmakers have wanted. But in calling for tax increases, the White House may have complicated negotiations on an issue that both parties recently cited as ripe for compromise.

"This is just another poke in the eye at Republicans, rather than showing a willingness to cooperate,” said Rep. Charles Boustany (R., La.), a member of the tax-writing Ways and Means Committee. "If the president were really interested in tax reform, rather than making political statements, he would have approached Congress and members of the Ways and Means committee in thoughtful ways.”

Mr. Obama surprised Republican leaders when the White House announced over the weekend that he will propose some $320 billion in tax increases over 10 years that are targeted at high-income Americans, and to use that money to pay for $235 billion in tax breaks mostly for moderate-income workers, plus other yet-unspecified initiatives.

The plan would increase taxes on investments held by high-income households by boosting top capital-gains tax rates and imposing capital-gains tax on many inherited assets.

Republicans, who control the House and Senate, have balked at the president’s plan, calling it the type of redistribution of wealth that Mr. Obama has long known Republicans oppose. But like Mr. Obama, Republican congressional leaders, as well as some potential GOP 2016 presidential candidates, have said they want to more directly address the economic anxiety that persists despite a growing economy and falling jobless rate.

So far, most of the attention among Republicans has been on lifting incomes of working families by boosting economic growth, though some in the GOP are proposing federal programs and tax plans. Sen. Marco Rubio of Florida has called for increasing the child tax credit and creating a monthly credit for low-income earners, while Sen. Rand Paul of Kentucky proposes tax breaks to promote investment in poor communities.

Democrats generally praised Mr. Obama’s plan as rightly focused on the middle class and sluggish wage growth, although Mr. Obama is seeking only about half of the minimum of $1 trillion in tax increases some in his party want.

"By seeking to address economic inefficiencies, including in our capital gains structure, and targeting these revenues toward investment in education and support for working parents, the president’s proposals would address the key issue of wage stagnation for most families,” said Rep. Sander Levin of Michigan, the top Democrat on the House Ways and Means Committee.

The White House hopes, at minimum, that Mr. Obama’s proposals put political pressure on Republicans to come up with their own plans. The president’s ideas could also soothe lawmakers in his own party who are being asked by the White House to support new trade pacts they oppose.

Mr. Obama’s annual address to the nation Tuesday night appears designed to cement a legacy as an economic populist and provide a road map for Democratic candidates looking to rouse middle-class support in the 2016 elections.

"If Republicans, who now speak of poverty and income inequality with some regularity, want to defend a tax loophole of trust funds for the wealthiest of Americans, then we look forward to hearing that argument,” a senior administration official said, referring to the proposal to tax additional inherited assets. "We’re going to make the counter on Tuesday night. We are calling it middle-class economics.”

Republicans already are irked by the president’s threats to veto two of the first pieces of legislation the new GOP-controlled Congress is considering: approving the Keystone XL pipeline and altering the Affordable Care Act. Some in the GOP said the president’s tax plan underscores a growing view that Mr. Obama appears unwilling to make significant compromises.

The White House said parts of Mr. Obama’s plan are modeled after Republican ideas, including a new fee on large banks and a tax break for households where two spouses work.

While Republicans rejected Mr. Obama’s tax plan, some said hopes for a deal weren’t extinguished. Brendan Buck, spokesman for House Ways and Means Committee Chairman Paul Ryan (R., Wis.), said Monday that Mr. Obama’s proposal "shows little understanding of where to find common ground with Republicans.” Yet Mr. Buck’s statement added that Republicans hope reaching an agreement "this year is still possible.”

Most of the GOP opposition stems from the plan to boost taxes on investment income, which Republicans say would harm economic growth by discouraging business investment and thereby hurt workers’ incomes.

Mr. Obama in his new proposal focuses on individual taxes, as opposed to the corporate tax code, at a time when broader consensus exists on the problems and solutions for the latter. Still, many Republicans have been wary of pursuing a business-only tax rewrite, in part because it could leave them vulnerable to charges that they are catering to corporations and the wealthy.

Mr. Obama’s plan would boost the top rate on capital gains to 28% from the current 23.8%. That is the rate paid by roughly the top 1% of earners, such as married couples making more than about $500,000. The plan also would impose capital-gains tax on many inherited assets, a move that the administration said would also fall largely on the wealthy.

Mr. Obama also would create a $500 annual tax credit for moderate-income households with two earners. In addition, he would triple the size of an existing child-care tax credit to $3,000 a year and broaden its availability to cover more middle-income people.

The president’s plan also would renew and modify several ideas he has proposed before, including permanent expansions of the earned-income credit for the working poor and a tax on large financial institutions.

Republicans continue to argue that across-the-board rate cuts are the best way to boost the economy. The proposed redistribution of wealth that would occur under the White House plan breeds resentment toward the highest earners, Republicans say, when they are often the most likely to be creating new jobs.

"The best opportunity for someone in the lower class is a good job, and that idea should be the idea we’re promoting, rather than taking from one to give to another,” said Rep. Diane Black (R., Tenn.), a Ways and Means Committee member.

Administration aides said Mr. Obama—who succeeded in forcing significant increases in taxes on high-income households just after his 2012 re-election—still hopes to find common ground with GOP lawmakers on a comprehensive rewrite of the U.S. tax code, for both individuals and businesses.

In a speech Tuesday, Sen. Orrin Hatch (R., Utah), the Senate Finance Committee’s new chairman, is expected to again call on the administration to propose a comprehensive tax plan, including what to do about small-business owners’ taxes.

"If you reduce the corporate rate, what do you do with all the people who are getting gouged” by current individual rates? Mr. Hatch said in a recent interview. "I think [an overhaul] should be comprehensive.”

Mr. Obama also has called for about $150 billion for infrastructure spending from a business-tax overhaul. Much of that would come from one-time revenue from closing business tax breaks.

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